Economist Paul Krugman , in his NY Times blog, wrote yesterday about The Trust Problem raised by the bailout proposed by US Treasury Secretary Paulson, Fed Chairman Bernanke, and President Bush. Never mind the merits of the case. The point Krugman is raising is about trust:

"The whole premise of the bailout push has been “We’re the grownups, we know what we’re doing, just trust us.” Sorry, but that’s how Colin Powell sold the Iraq war. Fool me once, shame on you, fool me twice … you shouldn’t get fooled. " [revised last line courtesy of GW Bush]

I try not to write about US politics in this blog: but this issue is non-partisan, arguably international—and undeniably huge. It’s an 800 pound gorilla for trust—it can’t be ignored. If trust as a social issue isn’t relevant here, I don’t know where it would be.

The Trust Equation suggests Trustworthiness is a function of (credibility + reliability + intimacy), all divided by the self-orientation of the one who would be trusted. How does Paulson fare?

As Krugman points out, Paulson’s got a ton of Wall Street cred—less so as a Treasury Secretary. Only months ago he was calling the economy firm, and one gets the strong sense he’s making this up as he goes along—like the rest of us. As evidence, Krugman contrasts Paulson’s plan—which famously and clearly called for no oversight—with his testimony of yesterday, which welcomed oversight. For credibility—maybe a B-minus.

On reliabilty, it’s tough for anyone. Reliability takes repeat experiences. But no one has this issue on their resume. One has to stretch to find comparable experiences, and unfortunately, the line stretches to another Bush cabinet member—Colin Powell and Iraq. Another good man who, it turns out, blew smoke at us. Given that track record, anyone in Paulson’s chair rates a C-minus at best.

The third factor, intimacy, is mainly determined by a willingness to be open and transparent about oneself. Paulson has done nothing to explain the theory behind his plan, which of course leads people to wonder if he has one—or if so, why he’s hiding it. Worse yet, given his mixed credibility and his (and anyone’s) inability to have a track record on this issue, that opacity makes him look even worse. In particular, it calls into question the demand by Paulson (and Bush) for immediate action, and the dire consequences if the demand is not met. Got to give him a D.

Self-orientation, the lone factor in the denominator, is the most powerful of the four. I don’t think anyone doubts Paulson’s commitment, nor his good intentions. Then again, most people this side of psychopaths have good intentions.

It’s not a good sign that he acquiesced to a political demand to reduce high compensation for masters of the universe who would be rescued. It suggests not only that Paulson is politically tone-deaf, but that his plan was not free of moral hazard. It’s not that Paulson is in it for himself, but it suggests there’s a lot in it for his old buddies. And absent a "theory of the case," or data, this looks pretty self-oriented. Another D, I’d say.

Remember the National Lampoon Magazine cover of the cute dog with a guy pointing a pistol its head? "Buy this magazine or we’ll kill this dog," the tag line said.

It sold a lot of magazines. Will it sell a mega “trust me” for a mega-bailout?

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